The Number: $41 Million

Foursquare has raised another $41 million in funding. That sounds like a lot, and it sounds like good news. The company is trying to change from being a niche, location-based social network to something more pervasive and powerful: what founder Dennis Crowley describes as “the location layer for the Internet.” In that model, Foursquare is both a social-location data company—its database of fifty million points of interest is built into over forty thousand applications, including Facebook’s Instagram and Twitter’s Vine—and one that competes with the likes of Yelp and Google Local to help people figure out where they should go next. It has a real shot at doing that: Foursquare is the only startup to come close to figuring out how location and social should come together, with a generally excellent application and service.

Why is Foursquare raising money this way? The company originally pursued additional capital at a valuation of around $800 million, a person in a position to have seen documents related to funding told me. This squares with something TechCrunch reported in November: that the numbers it floated had “a few VC shops skeptical.” (A Foursquare spokesperson declined to comment on the matter.)

Given its previous valuation of $600 million, Foursquare would have had to ramp up to the $800 million range to raise equity. But it could not close the round at a number that high. Reasons investors might have been skeptical include Foursquare’s revenues (just $2 million last year, according to Businessweek); less-than-astronomical user growth (founded in 2009, it had thirty million users as of January, 2013, so it is no Instagram); and a possibly less-engaged user base (Crowley would not reveal Foursquare’s number of monthly active users, a key social-networking metric, to AllThingsD, though it reports that daily checkins are up).

Startup companies hate having what’s known as a “down round,” in which money is raised at a valuation below one used previously; it can crush employee morale, among other bad things. It was a possibility Foursquare faced. So Foursquare pursued an alternative means of raising the capital. While the loan and convertible debt combination that make up the $41 million in capital do offer the benefit of not diluting the value of shares in the company, had it been able to push the valuation of the company substantially higher than before, to $800 million or more, it would have made those with equity in Foursquare potentially richer. And while valuation may largely be a game for pundits and journalists, it performs an important signaling function; increasing valuations indicate better prospects for a company, decreasing valuations the opposite.

The new infusion of capital could be exactly what the company needs to thrive: it could allow Foursquare to continue to grow and “get closer to being able to prove that there’s a real business here,” Crowley told Businessweek. Going quickly from making almost no money to making lots of money would not be an unheard-of trick in the technology world; Facebook and Twitter have done it. One hopes Foursquare succeeds: if Crowley can use it, as he promised in a talk I attended last month, to build a “Marauder’s Map” of the world—a reference to a magical map from the Harry Potter universe that reveals people, places, and secrets—we’ll all be better for it.